Tensions build in new, 'explosive' German coalition

By Paul Carrel
German Chancellor Angela Merkel receives applause after addressing a Christian Democratic Union (CDU) party congress in Berlin, Germany, February 26, 2018. REUTERS/Fabrizio Bensch

By Paul Carrel

BERLIN (Reuters) - Fault lines are emerging in Germany's new government before ministers have even held their first cabinet meeting, with tensions over the sequencing and extent of reforms already pulling at the fragile coalition.

Chancellor Angela Merkel's conservatives only turned to the center-left Social Democrats (SPD) to prolong their 'grand coalition' out of desperation after talks on a three-way alliance with two smaller parties collapsed last November.

Their subsequent 177-page coalition deal, clinched last month after difficult negotiations, is peppered with the phrase "We want to", leaving plenty of leeway for disagreements over competing priorities.

"Pensions, healthcare, Europe and asylum and migration policy are all areas where there are explosives built into the coalition agreement," Detlef Seif, deputy EU spokesman for Merkel's conservative parliamentary bloc, told Reuters.

With more than five months gone since September's election, Merkel is keenly aware that voters expect the new government - which takes office on Wednesday - to address their economic, social and security concerns quickly.

"With our coalition agreement, we have a book full of assignments and tasks to implement," she said on Monday.

The pressure is on for both camps to deliver: the inclusion in the coalition deal of a clause that envisages a review of the government's progress after two years gives each the opportunity to leave the ruling alliance then if it is not working for them.

The priority the government gives to different reforms set out in the coalition deal, the extent to which it implements them, and the personnel involved promise a cocktail of pressures that Merkel will need all her political skill to balance.

The SPD only agreed to ally with Merkel after promising a list of distinctive policies to secure the approval of party members, many of whom wanted the SPD to regroup in opposition after voters gave it no credit for the last four years of governing under Merkel.

SOCIAL SPENDING

It wants in particular to move ahead with social reforms - increased child benefit and changes in health insurance and education spending.

The coalition agreement foresees 12 billion euros ($15 billion) of investment in family, child and social measures, a stabilization in pensions, curbs on employers' use of fixed-term contracts and a review of how healthcare is funded.

SPD leaders know they need some quick wins. One recent poll had the far-right Alternative for Germany (AfD) surpassing the SPD for the first time in a national survey to become the second-strongest party.

However, senior members of Merkel's conservative bloc - her Christian Democrats (CDU) and the Bavarian Christian Social Union (CSU) - feel Social Democrat policies got too high a priority in the last government.

Its first year saw the passage of a flagship pension reform to lower the retirement age and legislation to introduce a national minimum wage - both key SPD projects.

This time, the conservatives' parliamentary leader, Volker Kauder, says his group will not allow that to happen again.

"The CDU/CSU parliamentary group will ensure that for each SPD issue, a concern of the CDU and CSU will be put forward," Kauder said at a CDU party conference held to approve the coalition deal.

For the conservatives, taking a tougher line on immigration after the 2015 refugee crisis is a top priority, as is spending on domestic and foreign security.

"If there is room for maneuver in the budget, we won't forget the armed forces," Kauder said.

The coalition deal foresees additional fiscal space of 46 billion euros ($57 billion) over the next four years.

Any additional surplus is earmarked primarily for defense, development and crisis prevention, with spending to be split equally between military and non-military projects.

DEFENSE AND EUROPE

But SPD leaders are likely to be skeptical about any big jumps in the defense budget. They have also raised questions about the NATO target of moving toward spending 2 percent of gross domestic output on the military.

Should economic growth slow and tax revenues come in weaker than projected - a scenario that new U.S. trade tariffs could help to bring about - the social spending plans dear to the SPD could also be threatened.

The issue of European Union reform, given great prominence in the coalition deal under the heading 'A new start for Europe', also promises to be contentious.

The agreement echoed the SPD's vocal backing for French President Emmanuel Macron's reform initiative, which foresees creating a euro zone Finance Ministry and budget. In their document, the CDU/CSU and SPD offered support for budgetary means to shield the euro zone from crises and said Germany was prepared to pay more into EU finances - albeit still stressing Germany's commitment to the EU's strict budget rules.

"I suspect the Social Democrats' vision is considerably different to ours," said Seif of the CDU, who worried about German taxpayers' money being splashed about. "We are not a debt or transfer union, and we don't want to become one."

To clinch the coalition deal, Merkel gave up the finance ministry to the SPD - a surprise concession, considering that the conservatives defeated the SPD by 32.9 percent to 20.5 percent in September.

New Social Democrat finance minister Olaf Scholz promises to be a safe pair of hands whose budgets will in any case be overseen by parliament.

But Scholz is close to Andrea Nahles, poised to take over as SPD leader in April in a move that will give the Social Democrats a significant platform outside the government.

Instead of becoming a minister, Nahles will lead the SPD's parliamentary party. A fierce debater with a common touch that Merkel lacks, Nahles promised after the election to "smash in the face" of the CDU.

"She's going to give Merkel a tough time," said Andrea Roemmele, professor at the Hertie School of Governance in Berlin. ($1 = 0.8133 euros)

(Writing by Paul Carrel; Editing by Kevin Liffey)